Milan was the son of Miloš Obrenović (1829–1861) and his Moldovan wife Elena Maria Catargiu (known in Serbia as Marija Obrenović). Milan's paternal grandfather (Miloš's father) was Jevram Obrenović (1790–1856), brother of the famous Serb Prince — Miloš Obrenović. Milan was therefore Prince Miloš's grandnephew. Milan had only one sibling — sister Tomanija.

Shortly after Milan's birth, his parents divorced. Several years later on 20 November 1861, at the age of seven, Milan lost his father Miloš who died fighting the Turks near Bucharest as a foreign mercenary in the Romanian Army, meaning that mother Marija got a legal custody. Marija, however, lived a lavish aristocratic lifestyle, soon becoming Romanian ruler Alexandru Ioan Cuza's mistress and bearing him two sons — Sașa and Dimitrie. As a result she showed little interest in her children from the previous marriage with Miloš so an agreement was reached for young Milan to get legally adopted by his cousin Mihailo Obrenović III who in the meantime, following the 1858 expulsion of the Karađorđevićs, returned to Serbia where he became the ruling prince in 1860.

Milan was brought to Kragujevac by Prince Mihailo Obrenović III who also arranged for a governess to raise the youngster. Decades later, once Milan became a king, details of his mother's personal life were often used by his political opponents, notably People's Radical Party leader Stojan Protić who went as far as making an untrue accusation in his paper Samouprava that King Milan's father is actually Alexandru Ioan Cuza, referring to King Milan pejoratively as Kuzić instead of Obrenović.

After bringing his nephew to Serbia, Prince Mihailo also took care of the youngster's education, sending him to Lycée Louis-le-Grand in Paris where young Milan reportedly displayed considerable maturity.

On 10 June 1868, when Milan was only fourteen years of age, Prince Mihailo Obrenović III was assassinated. As the late prince did not have any male heirs, the question of who was to succeed him on the Serbian throne became a pressing one. In the post-assassination chaos and the resulting power vacuum, influential senior statesman Ilija Garašanin re-emerged in Serbian political life, despite only eight months earlier being removed by the late prince from the ministry president post and replaced with Jovan Ristić. While consolidating forces within the state to prevent the conspirators from taking over the power, Garašanin also reportedly contemplated solving the throne issue by starting a third royal dynasty. General political consensus was that the new ruler should be selected by the Visoka narodna skupština (Grand National Council). However, cabinet minister Milivoje Petrović Blaznavac was rapidly increasing his power and influence. He had managed to consolidate his control over the army and stage a coup d'état. So when Blaznavac suggested the young Milan as the successor to Prince Mihailo, Garašanin had no choice but to yield to the more powerful authority.

As Milan was still underage to rule on his own, a regency was established to rule in Milan's name. The three-man council was headed by Blaznavac. Statesman and historian Jovan Ristić and Jovan Gavrilović, a politician and historian from a wealthy merchant family rounded out the trio.

Young Milan was brought back to Serbia from Paris and enthroned in front of the Topčider assembly while the Blaznavac controlled army surrounded the building just in case. Furthermore, prominent Serb nobleman from Dubrovnik, Medo Pucić, was brought to Belgrade to serve as teacher and adviser to the prince.

Under Blaznavac's tutelage, both personally and politically, the prince deferred to the head of the regency council in all matters of state. Prince Milan did not benefit from a large inheritance from his wealthy family as all of Prince Mihailo's vast property went to Mihailo's sisters (Prince Miloš's daughters) Petrija's and Savka's children.[1] The only property young Prince Milan did inherit was his late father's compound in Mărășești that had an overwhelming amount of debt associated with it.[1]

On 2 January 1869, the third Serbian constitution, mostly Ristić's creation, was promulgated.

In 1871, the prince faced two separate incidents although it is unclear as to whether these were genuine attempts on his life. In May as he exited the National Theatre building, a bomb exploded a couple of hundred metres away on Terazije. Buried under a footpath, the exploded device didn't cause anyone injuries. At the time and there was speculation in Serbia that it was Blaznavac who had organised the explosion in order to scare and confuse the young prince who was nearing his age of majority into remaining reliant on Blaznavac. The event became known as the Terazijska bomba (Terazije Bomb) in the Serbian historiography.

Several months later, on 6 October, Prince Milan was involved in another incident, this time during a visit to Smederevo. At some point, he went to an outhouse to relieve himself and while above the pit toilet, the wooden floor caved in under his weight and he fell into the pit. As he was armed at the time, the prince began shooting from his pistol in order get the attention of his entourage who rescued him. Historical accounts of the nature of this event differ. Historian Slobodan Jovanović thinks the occurrence was "likely coincidental".[2] On the other hand, historian Leontije Pavlović in his book Smederevo u XIX veku (Smederevo in the Nineteenth Century) states the conspirators doused the wooden floor with nitric acid that ate away at the planks. However, these claims couldn't be confirmed as he based them on an item from the historical archives that has since disappeared.[2] The entire episode is known as the Smederevski nameštaj (double meaning: The Smederevo Furniture or the Smederevo Setup).[2]

On 22 August 1872, Milan was declared of age, and he took government into his own hands. He soon demonstrated great intellectual capacity, coupled with a passionate headstrong character. Eugene Schuyler, who observed him about this time, found him to be a very remarkable, singularly intelligent and well-informed young man. The Principality of Serbia was still a de jure part of the Ottoman Empire though in reality it already had long functioned as a semi-independent state whose politics and economy was much more dependent on other Great Powers, particularly Austria-Hungary and Russian Empire, than on its formal ruler, the declining Ottomans. Milan carefully manoeuvred between the Austrian and Russian geopolitical interests in Serbia, with a judicious leaning towards the former.

When Serbs from the neighbouring Bosnia Vilayet (also part of the Ottoman Empire though a lot more integrated and loyal one due to its large Muslim population) began an uprising in July 1875 on the outskirts of Nevesinje, protesting the tax system as well as harsh treatment under local beys and aghas, Prince Milan condemned the uprising and refused to take part in it. The rival House of Karađorđević, whose members lived in exile across Europe, had a different approach, taking part in organising and implementing the uprising. Their actions included the 31-year-old Petar Karađorđević going to the Herzegovina region in order to fight under the pseudonym Petar Mrkonjić. As the uprising grew, spreading to the rest of Herzegovina and soon engulfing the entire Bosnia Vilayet, domestic pressure in the Serbian principality increased on young Prince Milan to help his Serb brethren.

On 5 October 1875, twenty-one-year-old Milan married sixteen-year-old Natalija Keşco, a second cousin, in a ceremony performed in accordance with Serbian Orthodox Churchrites. The bride was the daughter of Piotrj (Petre) Ivanović Keşco, a Moldavianboyar, who was also a colonel in the Imperial Russian Army. Keşco's wife, Natalija's mother, Pulcheria, was by birth a Sturdza (of the princely Sturdza family). Prince Milan and his bride Natalija were actually fairly close cousins because Milan's mother Elena and Natalija's father Piotrj were the kids of two sisters, meaning that Milan and Natalija shared a set of great-grandparents.[1] This relation meant that their marriage had to be specifically approved by the church, namely Metropolitan Mihailo Jovanović, the Metropolitan of Belgrade, however this wasn't done.[1]

A son, Alexander, was born to Natalija and Milan in 1876, but their relationship showed signs of friction right from the start.

On 6 March 1882, Principality of Serbia was declared a kingdom and Milan got proclaimed King of Serbia.

Acting under Austrian influence, King Milan devoted all his energies to the improvement of the means of communication and the development of natural resources. However, the cost of this, unduly increased by reckless extravagance, led to disproportionately heavy taxation. This, coupled with increased military service, rendered King Milan and the Austrian party unpopular.

Milan's political troubles were further increased by the defeat of the Serbians in the war against Bulgaria from 1885–1886. In September 1885, the union of Eastern Rumelia and Bulgaria caused widespread agitation in Serbia. Milan promptly declared war upon the new Bulgarian state on 15 November. After a short, decisive campaign, the Serbs were utterly routed at the Battle of Slivnitsa and at the Battle of Pirot. Milan's throne was only saved by the direct intervention of Austria-Hungary. Domestic difficulties now arose which rapidly assumed political significance.

In his personal life, Milan was anything but a faithful husband, having an affair with most notably Jennie Jerome (wife of Lord Randolph Churchill and mother to Winston Churchill) among others, while Queen Natalija was greatly influenced by Russian sympathies. In 1886, the couple, mismatched both personally and politically, separated after eleven years of marriage.

Natalija withdrew from the kingdom, taking with her the ten-year old Prince Alexander (later King Alexander I). While she was residing at Wiesbaden in 1888, King Milan succeeded in recovering the crown prince, whom he undertook to educate. In reply to the queen's remonstrances, Milan exerted considerable pressure upon the metropolitan, and procured a divorce, which was afterwards annulled as illegal. King Milan now seemed master of the situation.

On 3 January 1889, Milan adopted a new constitution much more liberal than the existing one of 1869. Two months later, on 6 March, thirty-four-year-old Milan suddenly abdicated the throne, handing it over to his twelve-year-old son. No satisfactory reason was assigned for this step. Milan settled in Paris as a private individual.

In February 1891, a Radical ministry was formed. Queen Natalija and the ex-Metropolitan Mihailo returned to Belgrade, and Austrian influence began to give way to Russian. Fear of a revolution and of King Milan's return led to a compromise, by which, in May 1891, the queen was expelled, and Milan was allowed a million francs from the civil list, on condition of not returning to Serbia during his son's minority.

In March 1892, Milan renounced all his rights and even his Serbian nationality. The situation altered dramatically, however, after the young Alexander I had effected his coup d'etat and taken government into his own hands in April 1893. Serbian politics began to grow more complicated, and Russian influence was rife. In January 1894, Milan suddenly appeared in Belgrade, and his son gladly welcomed his experience and advice.

On 29 April, a royal decree reinstated Milan and Natalija, who in the meantime had become ostensibly reconciled, in their position as members of the royal family. On 21 May, the constitution of 1869 was restored, and Milan continued to exercise considerable influence over his son. The queen, who had been residing chiefly at Biarritz, returned to Belgrade in May 1895, after four years of absence, and was greeted by the populace with great enthusiasm. The ex-king, again left the county because of this.

After reconciliation with son, Milan returned to Serbia in 1897, to be appointed as commander-in-chief of the Serbian army. In this capacity he did some of the best work of his life, and his success in improving the Serbian military system was very marked. His relations with the young king also remained good for a time. The Serbian pro-Democratic opposition was blamed him for the increasingly authoritarian rule of the young King, and a member of Radical Party, attempted to kill him on 6 July 1899, (24 June OS), on the Orthodox holiday of Ivanjdan (Birth of St. John the Baptist).

The good relations between father and son were interrupted, however, by the latter's marriage to Draga Mašin in July 1900. Milan opposed the match to the point that he resigned his post as commander-in-chief. Alexander subsequently banished Milan from Serbia. Milan left Serbia to Karlsbad, then to Timișoara and finally retired to Vienna. On 11 February 1901, Milan died unexpectedly. He was buried in Krušedol monastery, next to his grandaunt Princess Ljubica, Prince Miloš's wife.